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FORM 10--Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 0-6906
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MEDICORE, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-0941551
------------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
2337 West 76th Street, Hialeah, Florida 33016
- ------------------------------------------- ---------------
(Address of principal executive offices) (Zip
Code)
(305) 558-4000
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(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] or No [ ]
Common Stock Outstanding
Common Stock, $.01 par value - 6,600,275 shares as of July 31, 2002.
MEDICORE, INC. AND SUBSIDIARIES
INDEX
PART I -- FINANCIAL INFORMATION
- ------- ----------------------
The Consolidated Condensed Statements of Income (Unaudited) for the three
months and six months ended June 30, 2002 and June 30, 2001 include the accounts
of the Registrant and all its subsidiaries.
Item 1. Financial Statements
- -------- ---------------------
1) Consolidated Condensed Statements of Income for the three months and
six months ended June 30, 2002 and June 30, 2001.
2) Consolidated Condensed Balance Sheets as of June 30, 2002 and December
31, 2001.
3) Consolidated Condensed Statements of Cash Flows for the six months
ended June 30, 2002 and June 30, 2001.
4) Notes to Consolidated Condensed Financial Statements as of June 30,
2002.
Item 2. Management's Discussion and Analysis of Financial Condition and
- -------- Results of Operations
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
- -------- ----------------------------------------------------------------
PART II -- OTHER INFORMATION
- -------- ------------------
Item 1. Legal Proceedings
- -------- ------------------
Item 4. Submission of Matters to a Vote of Security Holders
- -------- -----------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- -------- -------------------------------------
PART I -- FINANCIAL INFORMATION
---------------------------------
ITEM 1. FINANCIAL STATEMENTS
-------- ---------------------
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
Revenues: 2002 2001 2002 2001
---------- ------------ ----------- ------------
Sales:
Product sales $ 220,685 $ 203,937 $ 461,720 $ 412,680
Medical service revenues 6,315,478 4,299,145 11,803,523 8,095,294
---------- ------------ ----------- ------------
Total sales 6,536,163 4,503,082 12,265,243 8,507,974
Other income 212,700 179,442 441,417 341,778
---------- ------------ ----------- ------------
6,748,863 4,682,524 12,706,660 8,849,752
Cost and expenses:
Cost of sales:
Cost of product sales 140,284 379,874 286,850 538,345
Cost of medical services 3,717,051 2,803,140 7,111,712 5,263,499
---------- ------------ ----------- ------------
Total cost of sales 3,857,335 3,183,014 7,398,562 5,801,844
Selling, general and administrative expenses 2,159,305 2,679,278 4,221,543 4,010,684
Provision for doubtful accounts 242,156 122,190 428,183 196,083
Interest expense 61,327 63,765 118,530 108,328
---------- ------------ ----------- ------------
6,320,123 6,048,247 12,166,818 10,116,939
Income (loss) from continuing operations before income
taxes, minority interest and equity in affiliate earnings (loss) 428,740 (1,365,723) 539,842 (1,267,187)
Income tax provision (benefit) 166,087 (826,697) 237,823 (808,876)
---------- ------------ ----------- ------------
Income (loss) from continuing operations before
minority interest and equity in affiliate earnings (loss) 262,653 (539,026) 302,019 (458,311)
Minority interest in income of
consolidated subsidiaries 143,398 69,001 211,087 126,680
Equity in affiliate earnings (loss) 13,621 (5,236) 60,325 (46,391)
---------- ------------ ----------- ------------
Net income (loss) from continuing operations 132,876 (613,263) 151,257 (631,382)
Discontinued operations:
Loss from operations of electro-mechanical manufacturing
operations, net of applicable income tax (benefit)
provision of $(114,000) and $25,000 --- (955,623) --- (962,814)
Gain on disposal of electro-mechanical manufacturing
operations, net of applicable income taxes of
$1,600,000 --- 2,605,175 --- 2,605,175
---------- ------------ ----------- ------------
Net income $ 132,876 $ 1,036,289 $ 151,257 $ 1,010,979
========== ============ =========== ============
Earnings per share:
Basic $ .02 $ .18 $ .02 $ .18
========== ============ =========== ============
Diluted $ .02 $ .18 $ .02 $ .18
========== ============ =========== ============
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001(A)
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,229,669 $ 10,359,372
Accounts receivable, less allowances of
$438,000 at June 30, 2002 and $753,000 at December 31, 2001 3,959,813 4,054,718
Note receivable 2,000,000 2,000,000
Receivable from sale of Techdyne 1,100,000 1,100,000
Inventories, less allowance for obsolescence
of $160,000 at June 30, 2002 and December 31, 2001 971,308 976,596
Prepaid expenses and other current assets 1,489,755 975,894
Deferred income taxes 372,000 372,000
----------- ------------
Total current assets 18,122,545 19,838,580
Property and equipment:
Land and improvements 1,027,108 1,027,108
Building and building improvements 3,184,632 3,121,406
Equipment and furniture 4,863,006 4,728,377
Leasehold improvements 2,481,581 2,270,034
----------- ------------
11,556,327 11,146,925
Less accumulated depreciation and amortization 3,934,374 3,601,794
----------- ------------
7,621,953 7,545,131
Receivable from sale of Techdyne 295,000 1,400,000
Deferred income taxes 166,000 166,000
Other assets 402,775 360,541
Goodwill 923,140 523,140
----------- ------------
$27,531,413 $ 29,833,392
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,120,604 $ 1,629,391
Accrued expenses and other current liabilities 2,695,999 2,422,805
Current portion of long-term debt 755,000 370,000
Income taxes payable --- 2,322,736
----------- ------------
Total current liabilities 4,571,603 6,744,932
Long-term debt 2,620,330 3,123,645
Deferred income taxes 688,000 688,000
Minority interest in subsidiaries 3,461,703 3,242,046
Commitments
Stockholders' equity:
Common stock, $.01 par value; authorized 12,000,000 shares;
6,600,275 shares issued and outstanding at June 30, 2002;
and December 31, 2001 66,002 66,002
Capital in excess of par value 12,810,649 12,806,898
Retained earnings 3,313,126 3,161,869
----------- ------------
Total stockholders' equity 16,189,777 16,034,769
----------- ------------
$27,531,413 $ 29,833,392
=========== ============
(A) Reference is made to the company's Annual Report on Form 10-K for the year
ended December 31, 2001 filed with the Securities and Exchange Commission
in March, 2002.
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
Operating activities: 2002 2001
------------ ------------
Net income $ 151,257 $ 1,010,979
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 548,746 1,073,553
Amortization 2,323 96,375
Bad debt expense 428,183 300,083
Provision for inventory obsolescence --- 349,805
Minority interest 211,087 (254,637)
Gain on sale of Techdyne --- (2,605,175)
Equity in affiliate (earnings) loss (60,325) 46,391
Stock and option compensation 3,751 1,032,550
Subsidiary forgiveness of stock option notes --- 207,825
Increase (decrease) relating to operating activities from:
Accounts receivable (333,278) (454,312)
Inventories 5,288 784,495
Prepaid expenses and other current assets (513,861) (231,734)
Accounts payable (508,787) (1,379,647)
Accrued expenses and other current liabilities 273,194 274,663
Income taxes payable (2,322,736) (914,417)
------------ ------------
Net cash used in operating activities (2,115,158) (663,203)
Investing activities:
Additions to property and equipment, net of minor disposals (475,568) (445,010)
Net proceeds from sale of Techdyne --- 9,852,114
Earn-out payment on sale of Techdyne 1,105,000 ---
Acquisition of dialysis center (550,000) ---
Collection on notes receivable --- 200,000
Investment in affiliate --- (152,810)
Decrease in loan to medical director practice --- 5,000
Sale of minority interest in subsidiaries 8,570 ---
Other assets 15,768 (20,787)
------------ ------------
Net cash provided by investing activities 103,770 9,438,507
Financing activities:
Line of credit borrowings 56,627 507,292
Proceeds from long-term borrowings --- 787,500
Payments on long-term borrowings (174,942) (413,782)
Subsidiaries repurchase of stock --- (63,396)
Deferred financing costs --- (11,882)
------------- -------------
Net cash (used in) provided by financing activities (118,315) 805,732
Effect of exchange rate fluctuations on cash --- 32,478
------------ ------------
(Decrease) increase in cash and cash equivalents (2,129,703) 9,613,514
Cash and cash equivalents at beginning of period 10,359,372 1,464,543
------------ ------------
Cash and cash equivalents at end of period $ 8,229,669 $11,078,057
============ ============
See notes to consolidated condensed financial statements.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The Consolidated Financial Statements include the accounts of Medicore,
Inc., and Medicore's 62% owned subsidiary, Dialysis Corporation of America
("DCA"). Medicore and its subsidiaries are collectively referred to as the
"company." All material intercompany accounts and transactions have been
eliminated in consolidation. DCA has a 40% interest in an Ohio dialysis center
it manages, which is accounted for by the equity method and not consolidated for
financial reporting purposes.
On June 27, 2001, the company sold its 71.3% interest in its
electro-mechanical manufacturing subsidiary, Techdyne, Inc. ("Techdyne") to
Simclar International Limited ("Simclar"). All material intercompany accounts
and transactions have been eliminated in consolidation. Techdyne's results of
operations are shown as discontinued operations in the Consolidated Condensed
Statement of Operations, requiring reclassification of amounts related to
Techdyne. See Note 9.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
The company's principal estimates are for estimated uncollectible accounts
receivable as provided for in our allowance for doubtful accounts, estimated
useful lives of depreciable assets, estimates for patient revenues from
non-contracted payors, and the valuation allowance for deferred tax assets based
on the estimated realizability of deferred tax assets. Our estimates are based
on historical experience and assumptions believed to be reasonable given the
available evidence at the time of the estimates. Actual results could differ
from those estimates.
Revenue Recognition
The company follows the guidelines of SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB101). Medical service
revenues are recorded as services are rendered. Product sales are recorded
pursuant to agreed upon shipping terms.
Accrued Expenses
Accrued expenses is comprised as follows:
JUNE 30, DECEMBER 31,
2002 2001
---------- ----------
Accrued compensation $ 639,793 $ 813,664
Due to insurance companies 975,430 671,935
Payable subsidiary minority interest acquisition 300,000 300,000
Other 780,776 637,206
---------- ----------
$2,695,999 $2,422,805
========== ==========
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
Other Income
Other income is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
-------- -------- -------- --------
Interest income $ 87,656 $ 59,752 $177,384 $129,641
Interest income from discontinued operations --- 3,321 --- 7,997
Rental income 73,599 41,540 146,169 83,085
Rental income from discontinued operations --- 37,500 --- 73,170
Management fee income 42,985 31,834 94,145 38,248
Other 8,460 5,495 23,719 9,637
-------- -------- -------- --------
$212,700 $179,442 $441,417 $341,778
======== ======== ======== ========
Earnings Per Share
Diluted earnings per share gives effect to potential common shares that
were dilutive and outstanding during the period, such as stock options and
warrants, using the treasury stock method and average market price.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Net income, numerator-basic computation $ 132,876 $1,036,289 $ 151,257 $1,010,979
Adjustment due to subsidiaries' dilutive securities (23,886) --- (33,320) ---
----------- ---------- ----------- ----------
Net income as adjusted, numerator-diluted computation $ 108,990 $1,036,289 $ 117,937 $1,010,979
=========== ========== =========== ==========
Weighted average shares-denominator basic computation 6,600,275 5,749,958 6,600,275 5,729,806
Effect of dilutive stock options --- ---
Weighted average shares, as adjusted-denominator diluted computation 194,738 --- 153,253 ---
----------- ---------- ----------- ----------
6,795,013 5,749,958 6,753,528 5,729,866
=========== ========== =========== ==========
Earnings per share:
Basic $ .02 $ .18 $ .02 $ .18
=========== ========== =========== ==========
Diluted $ .02 $ .18 $ .02 $ .18
=========== ========== =========== ==========
Comprehensive Income
Comprehensive income consists of net income, and in 2001, foreign currency
translation adjustments. Below is a detail of comprehensive income for the
three months and six months ended June 30, 2002 and June 30, 2001:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------
2002 2001 2002 2001
---------------- ----------- -------- -----------
Net income $ 132,876 $1,036,289 $151,257 $1,010,979
Other comprehensive income (loss):
Foreign currency translation adjustments --- (54) --- (39,416)
Reclassification adjustment foreign currency
Translation adjustments upon sale of subsidiary --- 197,937 --- 197,934
---------------- ----------- -------- -----------
Total other comprehensive income --- 197,883 --- 158,518
---------------- ----------- -------- -----------
Comprehensive income $ 132,876 $1,234,172 $151,257 $1,169,497
================ =========== ======== ===========
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Goodwill
Goodwill represents cost in excess of net assets acquired. Pursuant to
Statement of Financial Accounting Standards No. 142, since the company's
remaining goodwill was acquired after June 30, 2001 it will not be amortized but
will be subject to impairment testing commencing in 2002. See New
Pronouncements below and Note 10.
New Pronouncements
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Other than expanded disclosure requirements, FAS 141 has had no effect on the
company's consolidated financial statements. Under FAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators are present) for
impairment. Separable intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives (with no maximum life). The
amortization provisions of FAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the provisions of FAS 142 are effective for
fiscal years beginning after December 15, 2001. Pursuant to the provisions of
FAS 142, the goodwill resulting from DCA's acquisition of minority interest in
August 2001 is not being amortized for book purposes and is subject to the
impairment testing provisions of FAS 142 commencing in 2002, prior to which it
was subject to the annual impairment provisions of Accounting Principles Board
Opinion No. 17 "Intangible Assets," and FASB Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and
Assets to be Disposed of." This goodwill is also subject to the transitional
goodwill testing provisions of FAS 142 which require testing during the first
six months of 2002 for previously recorded goodwill, which testing indicated no
impairment for this goodwill. The goodwill resulting from the company's
acquisition of a Georgia dialysis center in April 2002 is not being amortized
for book purposes and is subject to the annual impairment testing provisions of
FAS 142. The company is evaluating the impact of the impairment testing
required by FAS 142, but does not expect that it will have a significant effect
on its consolidated results of operations, financial position or cash flows.
The pro forma consolidated condensed financial information below reflects
the company's operating results excluding amortization of goodwill.
SUMMARY PRO FORMA INFORMATION
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
--------------------------------------- --------------------------------------
Goodwill Pro Goodwill Pro
Actual Amortization Forma Actual Amortization Forma
----------- ------------- ----------- ----------- ------------- -----------
Net loss from continuing operations $ (613,263) $ 2,325 $ (610,938) $ (631,382) $ 4,650 $ (626,732)
Loss from discontinued operations, net of tax (955,623) 44,409 (911,214) (962,814) 88,818 (873,996)
Gain on disposal of discontinued operations,
net of tax 2,605,175 --- 2,605,175 2,605,175 --- 2,605,175
----------- ------------- ----------- ----------- ------------- -----------
Net income $1,036,289 $ 46,734 $1,083,023 $1,010,979 $ 93,468 $1,104,447
=========== ============= =========== =========== ============= ===========
Earnings per share:
Basic $ .18 $ .19 $ .18 $ .19
=========== =========== =========== ===========
Diluted $ .18 $ .19 $ .18 $ .19
=========== =========== =========== ===========
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment on Disposal of Long-lived
Assets" (FAS 144). FAS 144 clarifies when a long-lived asset held for sale
should be classified as such. It also clarifies previous guidance under FAS
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be disposed of." The company is required to adopt FAS 143 and FAS 144
in 2002. The company does not expect that FAS 143 and FAS 144 will have a
material impact on its consolidated results of operations, financial position or
cash flows.
NOTE 2--INTERIM ADJUSTMENTS
The financial summaries for the three months and six months ended June 30,
2002 and June 30, 2001 are unaudited and include, in the opinion of management
of the company, all adjustments (consisting of normal recurring accruals)
necessary to present fairly the earnings for such periods. Operating results
for the three months and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2002.
While the company believes that the disclosures presented are adequate to
make the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the company's latest annual report for the year
ended December 31, 2001.
NOTE 3--LONG-TERM DEBT
The company's medical products division has a $350,000 line of credit with
a local Florida bank, with interest at prime plus 1% payable monthly. This line
of credit matures January 22, 2003 and is secured by the accounts receivable and
inventory of the company's medical products division. The line had an
outstanding balance of approximately $242,000 at June 30, 2002 and $186,000 at
December 31, 2001.
In December 1988, DCA obtained a $480,000 fifteen year mortgage through November
2003 on its building in Lemoyne, Pennsylvania with interest at 1% over the prime
rate. The remaining principal balance under this mortgage amounted to
approximately $45,000 and $61,000 at June 30, 2002 and December 31, 2001,
respectively. Also in December 1988, DCA obtained a $600,000 mortgage on its
building in Easton, Maryland on the same terms as the Lemoyne property. The
remaining principal balance under this mortgage amounted to approximately
$57,000 and $77,000 at June 30, 2002 and December 31, 2001, respectively.
DCA through its subsidiary, DCA of Vineland, LLC, pursuant to a December 3,
1999 loan agreement obtained a $700,000 development and equipment line of credit
with interest at 8.75% through December 2, 2001 and 1.5% over the prime rate
thereafter which is secured by the acquired assets of DCA of Vineland and a
second mortgage on DCA's real property in Easton, Maryland on which an
affiliated bank holds the first mortgage. Outstanding borrowings were subject
to monthly payments of interest only through December 2, 2001 with monthly
payments thereafter of $2,917 principal plus interest with any remaining balance
due September 2, 2003. This loan had an outstanding balance of approximately
$680,000 and $700,000 at June 30, 2002 and December 31, 2001, respectively.
In April 2001, DCA obtained a $788,000 five-year mortgage through April
2006 on its building in Valdosta, Georgia with interest initially at 8.29% which
was revised to 7.59% in March 2002. Payments are $6,800 including principal and
interest commencing May 2001 with a final payment consisting of a balloon
payment and any unpaid interest due April 2006. This mortgage is guaranteed by
the company. The remaining principal balance under this mortgage amounted to
approximately $766,000 and $776,000 at June 30, 2002 and December 31, 2001,
respectively.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 3--LONG-TERM DEBT--(CONTINUED)
The company's debt included that of Techdyne and its subsidiaries Lytton
and Techdyne (Europe) until the company sold its interest in Techdyne in June
2001. See Consolidation under Note 1 above and Note 9.
DCA has an equipment purchase agreement for kidney dialysis machines at its
facilities with interest at rates ranging from 4.14% to 10.48% pursuant to
various schedules extending through August 2006. There was no additional
financing during the first half of 2002 and $73,000 additional financing for the
same period of the preceding year. Financing under this agreement represents a
noncash financing activity, which is a supplemental disclosure, required by FAS
95 "Statement of Cash Flows." The remaining principal balance under this
agreement amounted to approximately $1,576,000 and $1,678,000 at June 30, 2002
and December 31, 2001, respectively.
The prime rate was 4.75% as of June 30, 2002 and December 31, 2001.
Interest payments on debt amounted to approximately $35,000 and $84,000 for
the three months and six months ended June 30, 2002 and $222,000 and $463,000
for the same periods of the preceding year.
NOTE 4--INCOME TAXES
DCA files separate federal and state income tax returns with its income tax
liability reflected on a separate return basis.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For financial reporting
purposes, a valuation allowance has been recognized to offset a portion of the
deferred tax assets.
Income tax payments were approximately $122,000 and $2,580,000 for the
three months and six months ended June 30, 2002 and $214,000 and $217,000 for
the same periods of the preceding year.
NOTE 5--STOCK OPTIONS
On June 11, 1997, the board of directors granted a five-year non-qualified
stock option under the company's 1989 Stock Option Plan for 35,000 shares
immediately exercisable with an exercise price of $3.75 to a new board member,
which exercise price was reduced to $2.38 per share on September 10, 1997, the
market price on that date. That option expired June 10, 2002. On July 27,
2000, the board granted 820,000 five-year non-qualified stock options under the
1989 Plan to 17 officers, directors and employees of the company and its
subsidiaries. The options are exercisable at $1.38, the market price on the
date of grant, through July 26, 2005. In June 2001, two of those options for
115,000 shares were exercised with cash payment of the par value and the balance
due on exercise with a promissory note then forgiven resulting in an expense of
approximately $158,000. There are 704,000 options outstanding under the 1989
Plan at June 30, 2002.
On February 17, 2000, the company granted 150,000 non-qualified and 325,000
incentive stock options under its 2000 Stock Option Plan. The options are
exercisable for three years at $3.25 to February 16, 2003 and remain outstanding
at June 30, 2002.
In January, 2000, the company issued options to purchase 150,000 shares of
its common stock exercisable as a finder's fee in conjunction with the company's
investment in Linux Global Partners exercisable at $3.00 per share through
January 31, 2002. One of these options for 25,000 shares has been extended
through January 31, 2003. See Note 8.
In June, 1998, DCA's board of directors granted an option under the now
expired 1995 Stock Option Plan to a new board member for 5,000 shares
exercisable at $2.25 per share through June 9, 2003.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 5--STOCK OPTIONS--(CONTINUED)
In April, 1999, DCA adopted a stock option plan pursuant to which its board
of directors granted 800,000 options exercisable at $1.25 per share to certain
of its officers, directors, employees and consultants with 340,000 options
exercisable through April 20, 2000 and 460,000 options exercisable through April
20, 2004. In April 2000, the 340,000 one-year options were exercised for which
DCA received cash payment of the par value and the balance in three-year
promissory notes with interest at 6.2%. On January 2, 2001, DCA's board of
directors granted to DCA's president an option for 165,000 shares exercisable at
$1.25 per share with 66,000 options vested as of January 2002 and 33,000 options
vesting January 1 for each of the next three years.
In September, 2001, DCA's board of directors granted 75,000 five-year
options exercisable at $1.50 per share through September 5, 2006 to certain
officers, directors and key employees. 15,000 of the options vested immediately
with the remaining 60,000 options to vest 15,000 options each September 5
commencing September 5, 2002.
In March 2002, DCA's board of director's granted a five-year option for
30,000 shares exercisable at $3.15 per share through February 28, 2007 to an
officer. The option vests 7,500 shares each February 28 from 2003 through 2006.
In May, 2002, DCA's board of directors granted five-year options for 10,500
shares of DCA common stock to 17 employees, exercisable at $4.10 per share
through May 28, 2007. All options vest on May 29, 2004, and if there is a
change in affiliation of the employee with responsibilities to DCA which are of
a lesser nature than prior to the affiliation change, DCA has the discretion to
terminate the option of such employee.
NOTE 6--COMMITMENTS AND CONTINGENCIES
Effective January 1, 1997, DCA established a 401(k) savings plan (salary
deferral plan) with an eligibility requirement of one year of service and 21
year old age requirement. DCA has made no contributions under this plan as of
June 30, 2002.
Lytton, Incorporated, a subsidiary of Techdyne, sponsors a 401(k) Profit
Sharing Plan adopted by the company and Techdyne as participating employers
effective July 1, 1998. The discretionary profit sharing and matching expense of
the company amounted to approximately $2,000 and $5,000 for the three months and
six months ended June 30, 2002 and for the same periods of the preceding year.
Techdyne and Lytton are reflected in discontinued operations for 2001.
Subsequent to the sale of its interest in Techdyne in June 2001, the company
remains as a participating employer in this multi-employer plan. See Notes 1
and 9.
NOTE 7--BUSINESS SEGMENT DATA
The following summarizes information about the company's three business
segments, dialysis treatment centers (medical services), medical products and
new technology. The medical products and new technology divisions have been
shown separately even though not required by FAS 131. Corporate activities
include general corporate revenues and expenses. Intersegment sales, of which
there were none for the periods presented, are generally intended to approximate
market price. The company sold its interest in Techdyne in June 2001 for which
the operating results have been reclassified as discontinued operations and
accordingly are not included in the business segment data below. See Notes 1
and 9.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 7--BUSINESS SEGMENT DATA--(CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2002 2001 2002 2001
----------- ------------ ------------ ------------
BUSINESS SEGMENT REVENUES
Medical products $ 223,665 $ 203,935 $ 467,632 $ 412,695
Medical services 6,417,530 4,439,354 12,023,369 8,359,420
New technology 52,223 52,273 102,223 106,520
Corporate 56,538 45,946 115,637 90,628
Elimination of corporate rental charges
To medical products --- --- --- (1,830)
Elimination of medical services interest charge
to new technology --- (54,861) --- (109,108)
Elimination of medical services
interest charge to corporate (1,093) (4,123) (2,201) (8,573)
----------- ------------ ------------ ------------
$6,748,863 $ 4,682,524 $12,706,660 $ 8,849,752
=========== ============ ============ ============
BUSINESS SEGMENT PROFIT (LOSS)
Medical products $ (20,969) $ (278,858) $ (33,990) $ (333,177)
Medical services 550,829 169,495 790,926 378,433
New technology 52,223 --- 102,223 ---
Corporate (153,343) (1,256,360) (319,317) (1,312,443)
----------- ------------ ------------ ------------
$ 428,740 $(1,365,723) $ 539,842 $(1,267,187)
=========== ============ ============ ============
NOTE 8--INVESTMENT
During 2000, the company loaned an aggregate of $2,200,000 with a 10%
annual interest rate to Linux Global Partners, Inc. ("LGP"), a private company
investing in Linux software companies and attempting to initiate the development
and marketing of a Linux desktop software system. The loan is collateralized
with LGP's investments in other Linux software companies, in which securities
the company has a secured interest. During that period, the company also
acquired an 8% ownership interest in LGP. The company's initial investment of
$120 in LGP is accounted for at cost. A substantial portion of the loans were
originally scheduled to mature January 26, 2001. The company borrowed the funds
for its financing of LGP from DCA under the same terms and at the same interest
rate as its loan to LGP. Interest on the notes amounted to approximately
$52,000 and $102,000 three months and six months ended June 30,2002 and $52,000
and $106,000 for the same periods of the preceding year. Interest receivable on
the notes from LGP amounted to approximately $384,000 at June 30, 2002 and
$282,000 at December 31, 2001 and is included in prepaid expenses and other
current assets. The company agreed to extend the maturity of its notes
receivable from LGP on several occasions, first to June 30, 2001 for additional
consideration consisting of 400,000 additional shares of LGP stock representing
a 2% interest in LGP and the right to convert all or part of the loans into
convertible series A preferred shares of LGP. The company transferred 100,000
of its LGP shares to DCA in onsideration for our subsidiary's extension of the
loan to us. This increased DCA's ownership in LGP to 400,000 shares, including
300,000 LGP shares previously securing a note receivable written off by DCA with
a cost basis of approximately $140,000, which is included in deferred expenses
and other assets. Additionally, LGP agreed to repay all monies owed to us prior
to any other use of its private placement proceeds if we chose not to convert
the loans. On May 14, 2001, LGP repaid the $200,000 August, 2000 loan plus
$15,500 accrued interest. The company made payment of $215,500 to DCA. In
June, 2001, LGP paid $100,000 toward the accrued interest on the remaining
$2,000,000 outstanding notes. At the end of June, 2001, the company repaid DCA
the remaining outstanding loan of $2,000,000 and accrued interest of $279,000.
On August 2, 2001, the company entered into a loan extension agreement with LGP
extending the maturity date of the loans pending completion of LGP's proposed
private placement, in consideration for 50,000 LGP shares of common stock per
month until the loan is fully satisfied, and repayment of the loan based upon
the earlier of $100,000 per month or 25% of the proceeds from LGP's proposed
private placement. We have received the shares but no repayments. The company
currently owns approximately 12% of LGP, and DCA owns approximately 2% of LGP.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 9--SALE OF TECHDYNE INTEREST
On April 6, 2001, the company entered into an agreement with Simclar to
sell its 71.3% ownership interest in Techdyne to Simclar for $10,000,000, with
an earn-out consisting of 3% of consolidated Techdyne sales, net of returns,
allowances and bad debts for the three fiscal years commencing January 1, 2001
with a $2,500,000 minimum and $5,000,000 maximum earn-out. In April 2002, the
company received the first earn-out payment of approximately $1,100,000, with
$1,100,000 of the remaining minimum earn-out reflected as a current receivable
and the balance as a non-current receivable. The sale was subject to approval
by the company's shareholders' which was obtained at the company's annual
shareholders' meeting on June 27, 2001, with the sale to Simclar closing that
same day. See Note 1.
The pro forma consolidated condensed financial information presented below
reflects the sale of the company's interest in Techdyne as if it had occurred as
of January 1, 2001. For purposes of pro forma statement of operations
information, no assumption has been made that expenses have been eliminated
which were included in corporate expense allocations by the company to Techdyne
and which were included in the actual results of operations of Techdyne. No
assumption has been included in the pro forma information as to investment
income to be realized from investment of the proceeds of the sale. The summary
pro forma information is not necessarily representative of what the company's
results of operations would have been if the sale had actually occurred as of
January 1, 2001 and may not be indicative of the company's operating results for
any future periods.
SUMMARY PRO FORMA INFORMATION
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2001 2001
---- ----
Total revenues $ 4,679,000 $ 8,842,000
============ ============
Net loss $(1,596,000) $(1,708,000)
============ ============
Loss per share:
Basic $(.28) $(.30)
====== ======
Diluted $(.28) $(.30)
====== ======
The company recorded a pre-tax gain on the sale of its interest in Techdyne
of approximately $4,200,000, including the $2,500,000 minimum earn-out after
estimated costs of $200,000, with estimated income taxes of approximately
$1,600,000.
The Consolidated Condensed Statements of Income reflect as discontinued
operations the results of operations of Techdyne, net of applicable taxes.
Certain reclassifications have been made to prior period amounts in accordance
with this presentation.
The company provided certain financial and administrative services to
Techdyne under a service agreement. Subsequent to the company's sale of its
71.3% ownership interest in Techdyne to Simclar on June 27, 2001, the company
continued to provide services under the agreement through July 15, 2001, the
effective date of cancellation of the agreement.
Simclar refinanced Techdyne's long-term debt and Techdyne repaid its
remaining loan payable to the company including accrued interest in October
2001. See Note 1.
MEDICORE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
NOTE 10--ACQUISITIONS
In August 2001, DCA acquired the 30% minority interest in DCA of So. Ga.,
LLC, giving it a 100% ownership interest, for $600,000 with $300,000 paid in
cash and $300,000 payable in August, 2002 with this liability included in
accrued expenses and other current liabilities. This transaction resulted in
$523,000 of goodwill representing the excess of the $600,000 purchase price over
the $77,000 fair value of the minority interest acquired. The goodwill will be
amortized for tax purposes over a 15-year period. DCA's decision to make this
investment was based largely on the profitability of DCA of So. Ga. The party
from whom DCA acquired the minority interest has an agreement to act as medical
director of another of DCA's subsidiaries. If this party should fail to satisfy
the terms of the agreement, the purchase price of the 30% minority interest in
DCA of So. Ga. would be reduced to $300,000. See Note 1.
In April 2002, DCA acquired a dialysis center in Royston, Georgia for
$550,000, which was paid in cash. This transaction resulted in $400,000 goodwill
representing the excess of the $550,000 purchase price over the $150,000 fair
value of the assets acquired. The goodwill will be amortized for tax purposes
over a 15-year period. DCA's decision to make this investment was based on its
expectation of future profitability resulting from its review of the dialysis
center's operations prior to making the acquisition. See Note 1.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------- -------------------------------------------------------------------
RESULTS OF OPERATIONS
-----------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations, commonly known as MD&A, is our attempt to provide the investor with
a narrative explanation of our financial statements, and to provide our
shareholders and investors with the dynamics of our business as seen through our
eyes as management. Generally, MD&A is intended to cover expected effects of
known or reasonably expected uncertainties, expected effects of known trends on
future operations, and prospective effects of events that have had a material
effect on past operating results. In conjunction with our discussion of MD&A,
shareholders should read the company's consolidated condensed financial
statements, including the notes, contained in this Quarterly Report on Form
10-Q.
FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of the
1934. The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. Certain of the forward-looking
statements include management's expectations, intentions and beliefs with
respect to the growth of our company, the nature of the medical products and new
technology divisions in which we are engaged, the future and development of the
dialysis industry in which our 62% owned public subsidiary, DCA, is engaged,
anticipated revenues, our business strategies and plans for future operations,
our need for sources of funding for expansion opportunities and construction,
expenditures, costs and income and similar expenses concerning matters that are
not considered historical facts. Forward-looking statements also include our
statements regarding liquidity, anticipated cash needs and availability, and
anticipated expense levels in MD & A. Words such as "anticipate," "estimate,"
"expects," "projects," "intends," "plans," and "believes," and words and terms
of similar substance used in connection with any discussions of future
operations or financial performance, identify forward-looking statements. Such
forward-looking statements, like all statements about expected future events,
are subject to substantial risks and uncertainties that could cause actual
results to materially differ from those expressed in the statements, including
general economic, market and business conditions, opportunities pursued by the
company, competition, changes in federal and state laws or regulations affecting
our operations, and other factors discussed periodically in our filings. Many
of the foregoing factors are beyond our control. Among the factors that could
cause actual results to differ materially are the factors detailed in the risks
discussed in the "Risk Factors" section included in our Annual Report on Form
10-K (Item 1, "Business") as filed with the SEC, and provided to our
shareholders. Accordingly, readers are cautioned not to place too much reliance
on such forward-looking statements, which speak only as to the date made, and
which the company undertakes no obligation to revise to reflect events after the
date made.
Essential to the profitability of our dialysis operations is Medicare
reimbursement, which is at a fixed rate established by the Center for Medicare
and Medicaid Services ("CMS"). The level of DCA's, and therefore, our revenues
and profitability may be adversely affected by any potential legislation
resulting in Medicare reimbursement rate cuts. Operating costs tend to increase
over the years with the commencement of treatment at new centers. There also
may be reductions in commercial third-party reimbursement rates. Over the last
two years, Medicare rates have slightly increased, but are not related to the
increasing costs of operations. DCA is typically reimbursed at higher rates
from private payors, as well as higher payments under negotiated contracts with
hospitals for acute inpatient dialysis services.
The healthcare industry is subject to extensive regulations of federal and
state authorities. There are a variety of fraud and abuse measures promulgated
by the government to combat waste, which include anti-kickback regulations,
extensive prohibitions relating to self-referrals, violations of which are
punishable by criminal or civil penalties, including exclusion from Medicare and
other governmental programs. There can be no assurance that there will not be
unanticipated changes in healthcare programs or laws or that DCA will not be
required to restructure its practice and will not experience material adverse
effects as a result of any such challenges or changes.
DCA's future growth depends primarily on the availability of suitable
dialysis centers for development or acquisition in appropriate and acceptable
areas, and DCA's ability to develop these new potential dialysis centers at
costs within its budget while competing with larger companies, some of which are
public companies or divisions of public companies with greater personnel and
financial resources that have a significant advantage in acquiring and/or
developing facilities in areas targeted by DCA. Additionally, there is intense
competition for retaining qualified nephrologists who are responsible for the
supervision of the dialysis centers. There is no certainty as to when any new
centers or inpatient service contracts with hospitals will be implemented, or
the number of stations, or patient treatments such may involve, or if such will
ultimately be profitable. It has been our experience that newly established
dialysis centers, although contributing to increased revenues, have adversely
affected our results of operations due to start-up costs and expenses with a
smaller patient base until they mature.
Our venture into new technology is uncertain and competitive. We initiated
this segment in early 2000 with our investment and financing of LGP, a private
company involved with investments in Linux operating systems and software
companies and in the development of a Linux desktop software system. LGP
remains in its initial and development stage. Linux software systems require
development and financing and are subject to uncertainties as to market
acceptance, reliability, and other risks associated with new technologies.
RESULTS OF OPERATIONS
Consolidated revenues, after reclassification of discontinued operations
due to our sale of Techdyne on June 27, 2001, increased by approximately
$2,066,000 (44%) and $3,857,000 (44%) for the three months and six months ended
June 30, 2002 compared to the same periods of the preceding year. Sales
revenues increased by approximately $2,033,000 (45%) and $3,757,000 (44%)
compared to the preceding year. See Notes 1 and 9 to "Notes to Consolidated
Condensed Financial Statements."
Other income which is comprised of interest income, rental income,
management fee income and miscellaneous other income increased approximately
$33,000 and $100,000 for the three months and six months ended June 30, 2002
compared to the preceding year. Interest income increased approximately $25,000
and $40,000 due to investment of the proceeds from the sale of Techdyne.
Management fee income, which relates to a management services agreement between
DCA and its 40% owned Toledo, Ohio affiliate which commenced operations in
February 2001, increased $11,000 and $56,000. Miscellaneous other income
increased by $3,000 and $14,000. Rental income decreased by $5,000 and $10,000
as a result of a lease renegotiation with Techdyne which will provide greater
overall rent income to the company over the remaining lease term. See Notes 1
and 9 to "Notes to Consolidated Condensed Financial Statements."
Medical product sales revenues increased approximately $17,000 (8%) and
$49,000 (12%) for the three months and six months ended June 30, 2002 compared
to the same periods of the preceding year. Management is attempting to be more
competitive in lancet sales through overseas purchases and is attempting to
expand its customer base. The medical products division has expanded its
product line with several diabetic disposable products; however, demand to date
for these products has been less than anticipated. No assurance can be given
that efforts to increase sales will be successful.
Medical service revenues, representing the revenues of our DCA dialysis
division, increased approximately $2,016,000 (47%) and $3,708,000 (46%) for the
three months and six months ended June 30, 2002 compared to the same periods of
the preceding year. This increase includes increased revenues of our
Pennsylvania dialysis centers of approximately $493,000 and $804,000; including
revenues of approximately $209,000 and $322,000 for our new Mechanicsburg center
which commenced operations in January 2002; increased revenues of approximately
$97,000 and $359,000 for our New Jersey centers, and increased revenues of
approximately $1,426,000 and $2,518,000 for our Georgia centers, including two
which became operational in the third quarter of 2001 and one which was acquired
in April 2002. First half 2002 revenue also included $27,000 of consulting
fees. Although the operations of additional centers have resulted in additional
revenues, some are still in the developmental stage and, accordingly, their
operating results will adversely affect DCA's and our results of operations
until they achieve a sufficient patient count to sustain profitable operations.
Cost of goods sold as a percentage of consolidated sales, after
reclassification of discontinued operations due to our sale of Techdyne,
amounted to 59% and 60% for the three months and six months ended June 30, 2002
compared to 71% and 68% for the same periods of the preceding year. See Notes 1
and 9 to "Notes to Consolidated Condensed Financial Statements."
Cost of goods sold for the medical products division as a percentage of
sales amounted to 64% and 62% for the three months and six months ended June 30,
2002 compared to 186% and 130% for the same periods of the preceding year. Cost
of goods sold for the three months and six months ended June 30, 2001 included a
provision of $160,000 for obsolete and unusable inventory without which cost of
goods sold would have amounted to 107% and 92% for the three months and six
months ended June 30, 2001. Changes in cost of goods sold for this division
resulted from a change in product mix and a shift to overseas purchase of
lancets.
Cost of medical services sales as a percentage of sales decreased to 59%
and 60% for the three months and six months ended June 30, 2002, compared to 65%
for the same periods of the preceding year as a result of decreases in both
supply costs and payroll costs as a percentage of sales.
Selling, general and administrative expenses, after reclassification of
discontinued operations due to our sale of Techdyne, decreased $520,000 for the
three months ended June 30, 2002 and increased $211,000 for the six months ended
June 30, 2002 compared to the same periods of the preceding year. Selling,
general and administrative expenses for the three months and six months ended
June 30, 2001 included $875,000 of stock compensation, $158,000 from forgiveness
of stock options notes and $160,000 officer bonus compensation. Without these
unusual items in the preceding year, selling, general and administrative
expenses would have increased $673,000 and $1,404,000 for the three months and
six months ended June 30, 2002 compared to the same periods of the preceding
year. This increase reflects operations of DCA's new dialysis centers in Georgia
and Pennsylvania, and the cost of additional support personnel for DCA. As a
percent of consolidated sales revenue, without the unusual prior year items,
selling, general and administrative expenses remained relatively stable
amounting to 33% and 34% for the three months and six months ended June 30, 2002
compared to 33% for the same periods of the preceding year. See Notes 1 and 9 to
"Notes to Consolidated Condensed Financial Statements."
Provision for doubtful accounts receivable increased approximately $120,000
and $232,000 for the three months and six months ended June 30, 2002 compared to
the same periods of the preceding year. The provision for doubtful accounts
amounted to 4% and 3% of sales for the three months and six months ended June
30, 2002 compared to 3% and 2% for the same periods of the preceding year. This
increase reflects different collectibility levels associated with DCA's
operations in different geographic areas, such as DCA's expanded Georgia
operations, and with new dialysis centers such as the Mechanicsburg,
Pennsylvania center.
Interest expense, after reclassification of discontinued operations due to
our sale of Techdyne, decreased by approximately $2,000 and increased by
approximately $10,000 for the three months and six months ended June 30, 2002
compared to the same periods of the preceding year. The increase for the six
month period is primarily a result of additional DCA equipment financing
agreements, and DCA's April, 2001 Georgia mortgage with the effect of the
increased borrowings offset somewhat by lower interest rates. See Notes 1, 3
and 9 to "Notes to Consolidated Condensed Financial Statements."
The prime rate was 4.75% at June 30, 2002 and December 31, 2001.
Equity in affiliate earnings (loss) represents equity in the results of
operations of DCA's Ohio affiliate, in which DCA has a 40% ownership interest.
This dialysis center, which commenced operations in February, 2001, was
profitable for the first half of 2002 but operated at a loss for the same period
of the preceding year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital totaled $13,551,000 at June 30, 2002, which reflects an
increase of $457,000 (3%) during the six months ended June 30, 2002. The change
in working capital included a decrease in cash of $2,130,000, including net cash
used in operating activities of $2,115,000 (which includes income tax payments
of approximately $2,600,000 during the first half of 2002), net cash provided by
investing activities of $104,000 (including additions to property, plant and
equipment of $476,000, acquisition of a Georgia dialysis center for $550,000 and
the first earn-out payment on the sale of Techdyne of $1,105,000; see Notes 9
and 10 to "Notes to Consolidated Condensed Financial Statements"), and net cash
used in financing activities of $118,000 (including payments on long-term debt
of $175,000 and line of credit borrowings of $57,000).
During 2000, we acquired an 8% interest in LGP, which interest is now
approximately 12% in addition to which DCA holds approximately a 2% interest,
and loaned LGP $2,200,000 at an annual interest rate of 10%. We borrowed the
funds for the loans from DCA, with the loans having the same terms as our loans
to LGP. Interest on the notes amounted to $52,000 and $102,000 for the three
months and six months ended June 30, 2002 compared to $52,000 and $106,000 for
the same periods of the preceding year. In May, 2001, LGP made a payment of
$215,500 to us for the August, 2000 $200,000 principal balance and $15,500
accrued interest. We paid a like amount to DCA. In June, 2001, LGP paid $100,000
toward the accrued interest due on the notes. In June, 2001, we repaid DCA the
remaining $2,000,000 in loans it made to us with approximately $279,000 of
accrued interest. On August 2, 2001, we entered into a loan extension agreement
with LGP extending the maturity date of the loans in consideration for
additional LGP shares of common stock, and repayment of the loan based upon the
earlier of $100,000 per month or 25% of the proceeds from LGP's proposed private
placement. We have received the shares but not any repayments. See Note 8 to
"Notes to Consolidated Condensed Financial Statements."
DCA has mortgages with a Maryland bank on two buildings, one in Lemoyne,
Pennsylvania and the other in Easton, Maryland, with a combined balance of
$102,000 at June 30, 2002 and $138,000 at December 31, 2001. DCA through its
subsidiary DCA of Vineland, LLC, has a $700,000 development and equipment loan
secured by the acquired assets of DCA of Vineland and a second mortgage on DCA's
real property in Easton, Maryland. This loan had an outstanding balance of
$680,000 at June 30, 2002 and $700,000 at December 31, 2001. In April 2001, DCA
obtained a $788,000 five-year mortgage on its building in Valdosta, Georgia
which had an outstanding principal balance of $766,000 at June 30, 2002 and
$776,000 at December 31, 2001. DCA has an equipment financing agreement for
kidney dialysis machines for its facilities which had an outstanding balance of
$1,576,000 at June 30, 2002 and $1,678,000 at December 31, 2001. See Note 3 to
"Notes to Consolidated Condensed Financial Statements."
DCA needs capital primarily for the development of outpatient dialysis
centers. The construction of a 15 station facility, typically the size of DCA's
dialysis facilities, costs in the range of $600,000 to $750,000 depending on
location, size and related services to be provided, which includes equipment and
initial working capital requirements. Acquisition of an existing dialysis
facility is normally more expensive than construction, although acquisition
provides an immediate ongoing operation. DCA plans to expand its operations
primarily through development of new centers. Development of a dialysis facility
to initiate operations typically takes four to six months and usually 12 months
or longer to generate income. DCA opened its eleventh center in Mechanicsburg,
Pennsylvania in January 2002, is developing two new facilities, one in Ohio and
one in Maryland, and completed the acquisition of a dialysis unit in Georgia in
April 2002 for $550,000. In May 2002, we purchased land for $172,000 for
construction of a facility to house our new Ohio dialysis operation. We have
agreed to construct the facility, and upon completion we will sell the completed
facility to a corporation owned by one of the minority members and will lease
the facility from this corporation. DCA acquired the remaining 30% minority
interest in its DCA of So. Ga., LLC subsidiary in August, 2001 for $600,000 with
$300,000 paid in cash and $300,000 payable in one year, giving DCA a 100%
ownership interest in that subsidiary. See Notes 1 and 10 to "Notes to
Consolidated Condensed Financial Statements."
DCA is in different phases of negotiations for additional outpatient
centers. No assurance can be given that DCA will be successful in implementing
its growth strategy or that financing will be available to support such
expansion. A substantial portion of the proceeds from the sale of Techdyne are
anticipated to be used for expansion of our dialysis operations.
The bulk of our cash balances are carried in interest-yielding vehicles at
various rates and mature at different intervals depending on our anticipated
cash requirements.
We anticipate that current levels of working capital and working capital
from operations will be adequate to successfully meet liquidity demands for at
least the next twelve months.
DISCONTINUED OPERATIONS
The company sold its 71.3% interest in Techdyne in June 2001. Accordingly,
the results of operations of Techdyne, net of applicable taxes, have been
reflected as discontinued operations in our Consolidated Condensed Statements of
Income with prior period amounts reclassified to conform to this presentation.
See Notes 1 and 9 to "Notes to Consolidated Condensed Financial Statements."
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141, "Business Combinations" (FAS 141) and No. 142, "Goodwill and Other
Intangible Assets" (FAS 142). In June 2001, the FASB issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (FAS 143). In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment on Disposal of
Long-lived Assets" (FAS 144). The adoption of the new accounting pronouncements
is not expected to have a significant effect on the company's results of
consolidated operations, financial position or cash flows. See Notes 1 and 10
to "Notes to Consolidated Condensed Financial Statements."
CRITICAL ACCOUNTING POLICIES
The company has significant accounting policies relating to estimates and
revenue recognition as more fully described in Note 1 to "Notes to Consolidated
Condensed Financial Statements."
INFLATION
Inflationary factors have not had a significant effect on our operations.
We attempt to pass on increased costs and expenses incurred in our medical
products division by increasing selling prices when and where possible. In our
dialysis division, revenue per dialysis treatment is subject to reimbursement
rates established and regulated by the federal government. These rates do not
automatically adjust for inflation. Any rate adjustments relate to legislation
and executive and Congressional budget demands, and have little to do with the
actual cost of doing business. Therefore, dialysis medical service revenues
cannot be voluntarily increased to keep pace with increases in supply costs or
nursing and other patient care costs. Increased operating costs without a
corresponding increase in reimbursement rates may adversely affect DCA's and,
accordingly, our future earnings.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risks from changes in interest rates. We have
exposure to both rising and falling interest rates.
Sensitivity of results of operations to interest rate risks on our
investments is managed by conservatively investing liquid funds in short-term
government securities and interest bearing accounts at financial institutions in
which we had approximately $6,961,000 invested as of June 30, 2002. A %
decrease in rates on our investments as of June 30, 2002 would have resulted in
a negative impact of approximately $6,000 on our results of operations for the
first half of 2002.
We also have interest rate exposure on debt agreements with variable
interest rates of which we had approximately $1,034,000 of such debt outstanding
as of June 30, 2002. A 1% increase in interest rates on our variable rate debt
as of June 30, 2002 would have resulted in a negative impact of approximately
$1,000 on our results of operations for the first half of 2002.
We do not utilize financial instruments for trading or speculative purposes
and do not currently use interest rate derivatives.
PART II -- OTHER INFORMATION
------------------------------
Item 1. Legal Proceedings
- -------- ------------------
The company recently initiated an action against its former
subsidiary, Viragen, Inc., in the Circuit Court of the Seventeenth Judicial
Circuit in and for Broward County, Florida for breach of a royalty agreement it
has with Viragen, and for an accounting of sales. The company is seeking
payments due it under the royalty agreement for sales by Viragen and its
affiliates and sub-licensees of licensed products, including interferon, and all
products or any substance or group of substances which involve or include
interferon, whether produced naturally or through genetic engineering. The
company is also seeking damages, costs of the legal action, interest, and other
relief as the court deems just and proper. This action is in its initial
stages. We will keep you advised as to its progress.
Item 4. Submission of Matters to a Vote of Security Holders
- -------- -----------------------------------------------------------
The company has a staggered board of directors consisting of class 1, 2 and
3 directors. Each year at the annual shareholders meeting, one of the three
classes of directors is elected for a three year term. On May 29, 2002, the
annual meeting of shareholders was held to elect two members, Peter D. Fischbein
and Lawrence E. Jaffe, as class 1 members of the board of directors of the
company to serve for a three-year term until the annual meeting of shareholders
in the year 2005. Mr. Fischbein and Mr. Jaffe were reelected as board members,
and Wiss & Co. LLP, the company's independent accountants, were ratified as the
company's independent auditors for 2002. The tabulation of the voting is as
follows:
For the class 1 directors, Messrs. Fischbein and Jaffe:
Peter D. Fischbein Lawrence E. Jaffe
-------------------- -------------------
For: 5,981,849 5,982,149
Withhold: 4,540 4,240
Abstain: 77,995 77,995
Broker-no-votes: 4,000 4,000
------------ ------------
Total: 6,068,384 6,068,384
The other directors continuing in office include Robert P. Magrann and
Anthony C. D'Amore, class 2 directors whose term runs through the annual meeting
in 2003, and Thomas K. Langbein, Seymour Friend and Charles B. Waddell, class 3
directors whose term runs through the annual meeting in 2004.
For ratification of the selection of Wiss & Company, LLP as independent
auditors for fiscal 2002:
Wiss & Company, LLP
----------------------
For: 5,986,362
Withhold: 20,333
Abstain: 57,689
Broker-no-votes: 4,000
-------------
Total: 6,068,384
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
Part I Exhibits
None
Part II Exhibits
None
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDICORE, INC.
By /s/ DANIEL R. OUZTS
------------------------
DANIEL R. OUZTS, Vice President/
Finance, Controller and Principal
Financial Officer
Dated: August 12, 2002
Medicore, Inc.
2337 W. 76th Street
Hialeah, Florida 33016
(305) 558-4000
August 12, 2002
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Medicore, Inc. - Form 10-Q (File No. 0-6906)
Gentlemen:
Enclosed for filing pursuant to the EDGAR system is the above company's
Quarterly Report on Form 10-Q for the second quarter ended June 30, 2002.
The undersigned Chief Executive Officer and the Principal Financial Officer
of Medicore, Inc. certify that the quarterly report of the company for the
second quarter ended June 30, 2002 ("Quarterly Report") complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934, and the
information contained in the Quarterly Report fairly presents, in all material
respects, the financial condition and results of operations of the company.
Yours very truly,
/s/ Thomas K. Langbein
Thomas K. Langbein
Chief Executive Officer and President
/s/ Daniel R. Ouzts
Daniel R. Ouzts
Vice President/Finance, Principal
Financial Officer, Controller and Treasurer
cc: The Nasdaq Stock Market, Inc.